McKinsey publishes study on convergence of automotive and tech
Last month, McKinsey published their latest automotive industry study – ‘How the convergence of automotive and tech will create a new ecosystem’. The study looks at the four trends shaping the development of the automotive industry, how OEMs are responding to the entry of tech firms into the automotive sector and what the future for this relationship holds in store. Below is a summary of the key topics:
Four trends that favor software-driven innovation
The fortunes of players in the automotive sector have always depended on what customers see as valuable. Most of this value has resided in the hardware of vehicles and in the automakers’ brands. However, future innovations will probably focus on disruptive technology trends, so the customers’ perceptions of value will shift, increasingly putting incumbents in danger. The four trends that will favour the newcomers are these:
- Electrification: Drivetrains will shift toward hybrid-electric, electric, and fuel-cell technologies as they mature and become cheaper.
- Autonomous driving: The operation of automated cars will move from advanced driver-assistance systems to fully autonomous driving as the technology matures.
- Diverse mobility: As the sharing economy expands and consumer preferences change, the standard model will continue to evolve from outright purchase or lease to rentals and car sharing.
- Connectivity: The possibilities for “infotainment” innovations, novel traffic services, and new business models and services will increase as cars get connected to each other, to the wider infrastructure, and to people.
OEMs and suppliers face tough new competition
Many OEMs and tier-one suppliers can see the shift coming but might underestimate how much strategic change they must undergo to be part of the automotive sector’s future: they may lag behind the tech entrants in the asset base, skills, and resources needed to respond to this new competitive environment.
- Financial flexibility: Traditional OEMs often have limited financial flexibility as a result of low operating margins, low returns on invested capital (ROIC), and moderate market-capitalisation levels. Tech players, in contrast, tend to enjoy high financial agility, with robust operating margins, high ROICs, and large market caps.
- Deploying capital and people: Automakers command manufacturing and mechanical engineering assets and have large workforces weighted toward these disciplines. Technology companies focus much more on software and frontline computer assets, such as machine learning, with workforces weighted heavily toward software development.
- Operating models and culture: Automotive incumbents operate by a rich legacy of sectoral norms and conventions. They often adhere to rigid, rigorous, and unique product-development practices; work with complex supply chains; and sell through extensive franchised retail-dealer networks. The culture of OEMs values consistency, quality, and the minimisation of risk. Tech players prefer experimental, fast-moving cultures that reward innovation and risk taking. OEMs have traditionally favored incremental hardware innovations, while tech companies actively seek disruptive software products or services.
- Customer perceptions: Mass-market automotive brands, while strong, often evoke traditional values, such as reliability and efficiency, and thus lack the “coolness factor” that leading tech players enjoy thanks to their reputation for innovation and agility. In fact, tech brands took six of the top ten positions on a recent tally of the world’s most valuable brands; the first automotive one held 28th place.
Future OEM and high-tech automotive strategies
For mass-market OEMs, the emerging strategy is to go all out to build additional scale. This probably means additional consolidation in the sector, and the resulting entities might integrate backwardly to obtain key strategic suppliers. To succeed, OEMs will have to focus strongly on developing and producing market-leading hardware, such as bodies and interiors. They must also increase their margins by embracing digital manufacturing techniques (including 3-D printing and automation), added purchasing power, and the dilution of overhead. These changes would be similar to those undertaken by hardware manufacturers in the mobile-phone industry. In low-margin areas, scale is needed to generate substantial profits.
The convergence of the automotive and high-tech sectors will rewrite the rules of competition and lessen the chances of survival for traditional players that fail to act. The competitive space remains fluid at this point, but that could change quickly as incumbents move to position themselves advantageously and tech companies solidify their investment strategies.
In: CLEPA News